When you gift assets or transfer them at less than their market value to a ‘connected person’ for CGT purposes, the proceeds are taken to be the market value of the asset at the date of disposal, not what the connected person actually paid. A ‘connected person’ can be any immediate family member or business partner (excluding spouses, who are covered by separate legislation).
The legislation aims to prevent you from reducing your CGT liability by artificially creating capital losses by transferring assets to connected individuals at less than their market value, then using those losses to offset other gains.
However, for the transfer of certain business assets, it’s possible to elect for Gift Relief to apply. Either:
- The individual making the transfer pays the CGT on any gain arising from the actual proceeds received, but the remaining gain that would otherwise accrue using market value is deducted from the base cost in the hands of the gift recipient. This effectively passes the CGT liability onto them on their future sale of the asset; or
- If the asset is gifted without any charge, there is no CGT at the point of transfer for the transferor, but the full gain that would accrue using the market value, is deducted from the base cost of the gift recipient.
This allows you to donate an expensive asset to a ‘connected person’ and either avoid having to pay CGT in the case of an outright gift, or only pay CGT on the tangible proceeds received. This prevents you from having a large CGT liability without having realised any cash with which to settle it.
It’s important to note that only certain types of assets will qualify for Gift Relief. Broadly speaking, this includes assets used for the purpose of a trade, profession or vocation; any amount of shares in unlisted trading companies, shares and securities in listed personal trading companies (which broadly speaking is one in which you own more than 5% of the share capital and voting rights); transfers of agricultural property; or transfers of direct and indirect UK property interests to non-residents if within any of the previous categories.
When you dispose of these assets and realise a gain from the proceeds received, you may also be able to utilise any unused Business Asset Disposal Relief (up to the current lifetime limit of £1million), in addition to the benefits of Gift Relief. This will tax the whole gain at 10% as opposed to 20% for higher and additional rate taxpayers. This is an important consideration as the recipient of the gift may not meet the conditions for claiming Business Asset Disposal Relief so this may result in more CGT overall later down the line.
In order to use Gift Relief, both parties involved must make a joint election to HMRC within four years from the end of the tax year of the gift. This means you have until 5 April 2023 to claim a rebate for any CGT paid for assets gifted in the 2018/19 tax year. And you have until 5 April 2027 to claim Gift Relief on a donation made in the current tax year up to 5 April 2023.
A similar relief also applies to the transfer of business and non-business assets becoming immediately chargeable to Inheritance Tax, such as the transfer of assets to a trust.
When you gift assets or transfer them at less than their market value to a ‘connected person’ for CGT purposes, the proceeds are taken to be the market value of the asset at the date of disposal, not what the connected person actually paid. A ‘connected person’ can be any immediate family member or business partner (excluding spouses, who are covered by separate legislation).
The legislation aims to prevent you from reducing your CGT liability by artificially creating capital losses by transferring assets to connected individuals at less than their market value, then using those losses to offset other gains.
However, for the transfer of certain business assets, it’s possible to elect for Gift Relief to apply. Either:
- The individual making the transfer pays the CGT on any gain arising from the actual proceeds received, but the remaining gain that would otherwise accrue using market value is deducted from the base cost in the hands of the gift recipient. This effectively passes the CGT liability onto them on their future sale of the asset; or
- If the asset is gifted without any charge, there is no CGT at the point of transfer for the transferor, but the full gain that would accrue using the market value, is deducted from the base cost of the gift recipient.
This allows you to donate an expensive asset to a ‘connected person’ and either avoid having to pay CGT in the case of an outright gift, or only pay CGT on the tangible proceeds received. This prevents you from having a large CGT liability without having realised any cash with which to settle it.
It’s important to note that only certain types of assets will qualify for Gift Relief. Broadly speaking, this includes assets used for the purpose of a trade, profession or vocation; any amount of shares in unlisted trading companies, shares and securities in listed personal trading companies (which broadly speaking is one in which you own more than 5% of the share capital and voting rights); transfers of agricultural property; or transfers of direct and indirect UK property interests to non-residents if within any of the previous categories.
When you dispose of these assets and realise a gain from the proceeds received, you may also be able to utilise any unused Business Asset Disposal Relief (up to the current lifetime limit of £1million), in addition to the benefits of Gift Relief. This will tax the whole gain at 10% as opposed to 20% for higher and additional rate taxpayers. This is an important consideration as the recipient of the gift may not meet the conditions for claiming Business Asset Disposal Relief so this may result in more CGT overall later down the line.
In order to use Gift Relief, both parties involved must make a joint election to HMRC within four years from the end of the tax year of the gift. This means you have until 5 April 2023 to claim a rebate for any CGT paid for assets gifted in the 2018/19 tax year. And you have until 5 April 2027 to claim Gift Relief on a donation made in the current tax year up to 5 April 2023.
A similar relief also applies to the transfer of business and non-business assets becoming immediately chargeable to Inheritance Tax, such as the transfer of assets to a trust.
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Tax planning and advice for individuals
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